Direct plans made default option: Why costs matter for MF investors

Sebi's move to make direct mutual fund plans the default on fund houses' digital platforms puts the spotlight on costs, but investors must weigh lower fees against the value of ongoing advice.

On October 28, 2026, Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey announced that direct plans would become the default option on fund houses’ digital platforms. Investors who choose regular plans must be told that they cost more. While this change makes costs more visible, investors must assess how much handholding they need.

 

Who benefits from the change

 Direct plans have been available for almost 14 years. “The emphasis on expense ratios aims to create greater awareness of direct plans,” says Renu Maheshwari, co-founder and principal adviser, Finscholarz Wealth Managers.

Until October 31, 2026, the websites of some asset management companies (AMCs) made it easy for investors to choose regular plans by mistake. “At one leading AMC, investors with an existing regular-plan investment had to notice and uncheck a preselected box to avoid another regular-plan investment,” says Avinash Luthria, Sebi-registered investment adviser and founder, Fiduciaries.

 

 “Making direct plans the default may prevent accidental investment in regular plans by requiring a conscious decision to choose the costlier plan,” says Vedant Gupte, co-founder and chief executive officer (CEO), Trackk, an investment platform.

 Young, first-time systematic investment plan (SIP) investors with long horizons and small investment amounts stand to benefit most from choosing direct plans. Fees that look small today compound against investors over 20–30 years. “The change may also motivate some investors who are no longer in touch with their distributors to switch to direct plans,” says M Pattabiraman, associate professor, Indian Institute of Technology Madras, and founder, Freefincal.

 However, the default change applies only to fund houses’ own digital platforms. It does not cover bank branches, distributor apps or third-party platforms. “Many investors may still believe that regular plans charge only a one-time commission,” says Luthria. They need to understand that the higher fee applies to every tranche of their investment.

 

Why costs matter

 A higher expense ratio reduces net returns. “While money that is invested compounds, expenses create a drag on that compounding,” says Maheshwari.

The long-term impact can be sizeable. A monthly systematic investment plan (SIP) of ₹10,000 for 20 years at an assumed 12 per cent return in a direct plan grows to roughly ₹99.9 lakh. At an assumed 11 per cent return in a regular plan, the same SIP grows to roughly ₹87.35 lakh. The gap of about ₹12.56 lakh exceeds half the ₹24 lakh invested.

“Investors cannot control performance, but expense ratio is a factor they can control,” says Vishal Dhawan, CEO and founder, Plan Ahead Wealth Advisors.

 

Match plan to your needs

 Investors who can decide on their asset allocation, rebalance annually and avoid panic selling in a crash should choose low-cost direct plans. “The relevant test is whether they can remain invested when their portfolio falls 25 per cent, rather than merely whether they can pick a fund,” says Gupte.

 A regular plan can be worthwhile for someone who would otherwise not invest or would exit at the worst possible moment. “However, the distributor should provide ongoing monitoring-and-review services because the higher expense ratio is paid continuously, rather than once,” says Dhawan.

 Investors who can't build their own portfolios should choose a direct plan and pay for advice separately. “Use the money saved on commissions to hire an independent, fee-only fiduciary adviser, paid directly from your pocket,” says Maheshwari.

 Paying the adviser a fee removes the conflict of interest associated with incentivised scheme sales. “It replaces an invisible, perpetual sales fee with accountable, transparent advice. Since the client pays the advisor’s fee, the advisor acts in the investor’s interest,” says Maheshwari.

 

Expense ratio and active funds 

 Scheme expenses have two components: Fund management expenses and commissions. The difference between direct and regular plans reflects commission expenses. Even after an investor has chosen a direct plan, they need to pay attention to the expense ratio (comprising fund management expenses).

 The importance of expenses varies by fund category. Active largecap managers may find it harder to beat the market, so index funds may be preferable in that category. Some midcap and smallcap managers may beat the index despite higher expense ratios, so investors may consider combining index and active strategies in these categories.

 “The usual portfolio approach combines passive funds for the core with active funds for the satellite allocation,” says Maheshwari.

 The expense ratio matters, but it is not the most important consideration when choosing an active fund. “Assess whether the fund’s consistency in generating alpha justifies its expenses. Examine rolling returns alongside risk ratios and performance measures, including Sharpe ratios, downside capture and information ratio,” says Dhawan.

 

Scrutinise debt fund costs

 The expense ratio is a more critical criterion in debt fund selection because these funds generate lower absolute returns. An expense ratio of 0.8 per cent can consume almost 10–12 per cent of the total yield. “To deliver competitive yields despite a high total expense ratio, managers may compromise on paper quality and take credit risk,” says Maheshwari.

 A fund with a higher expense ratio may also take more duration risk to earn higher returns when interest rates fall. “Paying attention to expenses helps guard against excessive risk in the debt portfolio,” says Dhawan.

 

Give a lot of weight to cost in passive funds

 Tracking error and the expense ratio are the two decisive factors when choosing an index fund or exchange-traded fund (ETF). “Expenses are particularly important in passive funds because they follow the market rather than seeking alpha,” says Maheshwari.

 Some index funds are structured as fund-of-funds that invest in ETFs, while others are created as index funds. A fund-of-funds has slightly higher expenses than the underlying ETF because of fund management costs. “Check that this additional expense is not excessive,” says Maheshwari.

 Finally, remember that fund houses may use an exceptionally low, loss-making base expense ratio as bait to acquire clients, then raise it later. “Focus on the base expense ratio over the next several decades rather than its current level alone,” says Luthria.